RPT-BAY STREET-Prospect of profits rise doesn’t calm TSX nerves

(Repeats Sunday’s column)

* TSX/60 companies’ quarterly earnings seen rising 1.5 pct

* Gold miners could have banner quarter

* Investors fret about downside risks after recent rally

By Ka Yan Ng

TORONTO, Oct 17 (BestGrowthStock) – Rising profits at Canada’s
biggest companies may not be enough to shake the Toronto stock
market free of the vertigo that has accompanied its rapid
recent rise to two-year highs.

Fueled by rallying commodity prices and the prospect that
the U.S. Federal Reserve will put up extra economic stimulus,
the Toronto Stock Exchange’s S&P/TSX composite index last week
hit its highest level since the collapse of Lehman Brothers.

Some hope the imminent earnings season, which should
include banner results for gold miners, will validate and
extend a rally that some fear has brought the market too far,
too fast. Many veteran market watchers, however, are wary.

“This one, and the next quarter, are going to be really
important. But this one especially so because the stock market
has done so well in the third quarter,” said Patrick McHugh, a
senior portfolio manager for Canadian large-cap stocks at MFC
Global Investment Management.

“There’s still a lot of scare and uncertainty in the
marketplace. If companies don’t excite investors with what they
report or what they have to say, we may see people take money
off the table.”

The S&P/TSX composite index (.GSPTSE: ) rallied nearly 10
percent in the third quarter, and is up almost another 2
percent so far in the month of October — a historically
treacherous month. [ID:nN01110674]

It closed on Friday at 12,609.07, still a far cry from its
pre-financial crisis peak at 15,154.77.

Companies in the exchange’s blue-chip S&P/TSX 60 index
(.TSE60: ) are expecting aggregate earnings growth of 1.5 percent
in third-quarter earnings per share compared with last year,
according to Thomson Reuters StarMine SmartEstimates.

The index is trading at about 10.8 times 12-month forward
earnings. Analysts said market focus on company forecasts for
profit and revenue will remain intense given that the outlook
for the economy is so uncertain.

“It’s a dangerous game for companies to be playing with
guidance particularly in the environment that we’re in. It
wouldn’t surprise me to see much wider windows of guidance
going forward,” said Michael Sprung, president of Sprung & Co
Investment Counsel.

“I think it’s somewhat of a mug’s game at the moment.”

Given the economic uncertainty, many money managers say
they will stick to shares of companies with strong balance
sheets, a leading position in their industry, and a track
record of paying dividends.

The reporting season for blue chip Canadian firms kicks off
on Oct. 20 with Canadian energy giant EnCana Corp (ECA.TO: ),
followed by Canadian Natural Resources (CNQ.TO: ) and Cenovus
Energy (CVE.TO: ).

Other major companies due to report in coming weeks include
Teck Resources (TCKb.TO: ), Barrick Gold (ABX.TO: ), and takeover
target Potash Corp (POT.TO: ).

Results from railways Canadian National (CNR.TO: ) and
Canadian Pacific (CP.TO: ) will be closely watched as a barometer
of economic activity.

BAR IS SET HIGH

Elvis Picardo, analyst and strategist at Global Securities,
said the market is quite optimistic about the earnings season
but he thinks the bar has been set “fairly high”.

In terms of revisions to results estimates, analysts have
boosted the healthcare sector by 37.4 percent over the past 30
days, the most among the S&P/TSX index’s 10 main groups,
Thomson Reuters data indicated. Energy names had the most
downwardly revised estimates, down 2.5 percent.

Across Canada’s energy sector, companies will generate
mixed results, analysts said, with profit and cash flow
improving in many cases from last year but weakening from the
second quarter. [ID:nN07267143]

Thomson Reuters data also showed that the index’s materials
and healthcare groups are expected to post the highest earnings
growth rates over the next 12 months, rising about 51 percent
and 26 percent, respectively.

“The materials sector should be in the limelight,
especially gold. There’s no reason for them to not have a
banner earnings with the price of gold being what it is,”
Picardo said.

Gold-mining stocks could be a risky group this quarter,
with some having already risen some 30 percent in the past
three months. But Picardo also noted that disappointing numbers
may be forgiven readily if gold continues to rocket upward.

The market’s heavily weighted banks do not report their
final quarter results until late November or early December.
Some market watchers say improving loan loss provisions and a
resumption of dividend hikes in the bank sector will help push
the market higher.

“When you start to see banks as a group come through and
announce dividend increases, I think from a psychological
perspective, that speaks well,” said MFC’s McHugh.

($1=$1.01 Canadian)
(Reporting by Ka Yan Ng; Editing by Jeffrey Hodgson)

RPT-BAY STREET-Prospect of profits rise doesn’t calm TSX nerves